As an entrepreneur, you've certainly heeded the call of passion for your work. Maybe you even subscribe to Marsha Sinetar's sage chestnut, "Do what you love, and the money will follow." But until a few years ago, there was a distinct difference between starting a business with an eye toward the bottom line and taking the same plunge for social good. Then along came the L3C.
Often called "the for-profit with a nonprofit soul" by Robert Lang, one of the architects of the business structure, an L3C is a hybrid model that allows owners to do well by doing good. The bonus? L3Cs can get funding from sources that have traditionally been hard to tap--such as foundations.
What It Is
The L3C, just like the LLC, is a for-profit business structure. Rick Zwetsch, principal partner with interSector Partners--the first L3C in Colorado--notes that the reason you may not have heard of L3Cs is because legislation for them has only been signed into law in Vermont, Michigan, Wyoming, Utah and Illinois, as well as the Crow Indian Nation and the Oglala Sioux Tribe.
Lexington, KY - Philanthropists inject vast amounts of capital into attempts to solve the problems facing our world. Foundations, corporations and individual donors have long given generously, albeit at a lower percentage over the last two years. Along with the giving, there has been a proliferation of nonprofits over recent years, addressing a plethora of societal needs.
However, old problems remain and new ones arise. Certainly there are success stories, but it is excruciatingly clear that traditional philanthropy falls short. There is not enough money, nor is there always an effective solution to fund. Simply throwing more money out without a strategic approach is like bailing out a bottomless boat. Donors are realizing that it is time for game-changing philanthropic methods.
For L3C companies, profit isn't the point
Vaughn Chase turned to an unusual corporate structure -- L3C,
designed for "low-profit" ventures -- to keep his Maine family farm
in business.
By Malika Zouhali-Worrall, contributing writer • February 8, 2010: 1:46 PM ET
NEW YORK (CNNMoney.com) -- When organic dairy farmer Vaughn Chase received a letter informing him that processor H. P. Hood would no longer be taking his milk, he feared he'd be forced out of business.
Three years earlier, he had invested $25,000 in converting his 600-acre family farm to meet the U.S. Department of Agriculture's organic certification standards. But now he couldn't find another organic processor willing to take the milk from his remote farm in Maine. With the price of non-organic milk plummeting below production costs, returning to conventional farming wasn't an option either.
"That was suicide," says Vaughn, 54, who owns about 60 milking cows. "I couldn't put my family through that. I might as well quit."
Vaughn's was one of 10 small farms in Maine let go by H. P. Hood last year; luckily, none had to quit. With the support of local government agencies and a business consultant, Vaughn and the other farmers created a company to process and distribute their milk locally under their own brand, Maine's Own Organic Milk Company -- MOOMilk.
L3Cs: The Hybrid Way to Do Well by Doing Good
BY Lydia Dishman ► Mon Jan 25, 2010
As nonprofits brace for the aftershock of state and federal funding cuts (not to mention a shortfall in private donations) there are those who are quietly taking another path out of the rubble. They are the pioneers of a new type of organization, known as an L3C.
It's a hybrid aimed at providing social benefits while keeping an eye on the bottom line. Over 100 have been formed in the six states with laws that allow for their structure. Unlike nonprofits, L3Cs pay taxes, and contributions made to them are not tax deductible.
Nonprofits benefit from for-profit practices December 28, 2009
Socially minded enterprises get nimbler amid weak economy, stiff competition for donations Ann Meyer | Minding Your Business
Seth Weinberger has built a local educational foundation into a million-dollar social enterprise serving about 30,000 underprivileged students in 15 states, proving that not every nonprofit is struggling these days.
Most of the growth has come during the past 18 months, when the Evanston foundation, Innovations for Learning, launched TeacherMate, a literacy program centered on hand-held computers equipped with special software in English and Spanish.
While new research from the University of Illinois at Chicago indicates the hand-held gadgets improve students' reading scores, the program also receives high marks for cost efficiency. By contracting with a Chinese manufacturer to produce the devices, Weinberger said, he can price the TeacherMate system at $100, which includes reading and math software for kindergarten through second grade. That's less than the cost of textbooks over the same period, he said.
Weinberger, an attorney at Mayer Brown who also serves as president of the foundation, adopted best practices from the for-profit arena to expand the nonprofit. In 2010, he plans to make the literacy software available as an iPhone app, boosting efficiencies and extending the software's reach to more children.
"If you have limited resources, then you have to get even smarter," he said.
Last I heard, the White House Office of Social Innovation and Civic Participation is focused on granting some $50 million to organizations that have proven to be successful and innovative. Maybe I'm missing something, but isn't giving money to innovative organizations what hundreds of foundations try to do every year?
Using the power of the White House for this purpose is like using Steve Jobs to write code.
While this segment doesn't relate specifically to L3Cs, we believe an increase
in the number of angel investors, especially those with keen, new or renewed interest
in socially responsible/mission related investing is potentially great news for L3Cs!
“Low-Profit” Corporations Enable Social Venture Capital Published by admin at 11:48 am. Tags: law, non-profit, social enterprise A “low-profit limited liability corporation” is allowed to make money, but can also accept tax-deductible loans. Michigan,Vermont, Wyoming, Utah and Illinois passed laws this year defining a new type of corporation called an L3C, creating interesting new investment incentives and legal protections for socially-conscious market entities. Chicago tax attorney Mark Lane, who helped get low-profit legislation passed in Illinois, suggests that we think of the L3C as a structure for socially-conscious venture capital. In this video, Lane painstakingly presents the details of this new type of corporation. On first reading, it does seem like a plan that only a tax attorney could love. The L3C is, in some sense, little more than a carefully designed IRS category — but it could channel a lot of new money to social entrepreneurs. The trick is that private foundations would be allowed to deduct certain kinds of loans to L3Cs just like donations to non-profits, but the L3C would hope to make a profit and eventually return the money with interest. Given that foundations have to give 5% of their net worth to charity every year anyway, it’s a huge win for them to give it as a speculative loan rather than a grant. The “low-profit” structure could also ease a classic dilemma between public and private operations. Public entities and non-profit corporations are legally obligated to operate in the public interest, but can be horribly inefficient due to the lack of competitive pressures and, often, shielding from financial accountability. Meanwhile, private corporations live or die on their efficiency but can be sued by investors if they fail to maximize raw profit. The L3C is something in between: a business that is required to operate in the public interest and can accept of tax-deductible investments, but can also pay a profit to partners and investors. This hybrid funding model may prove especially useful in the production of public goods, the things that benefit everyone but are difficult to get anyone to pay for. The L3C has been proposed for groups working in education, small industry, biotech, arts, and journalism. For more, see overviews from Social Earth and the Non Profit Law Blog.
Spare a Dime for the Times? Can needy newspapers accept donations? By Menachem Kaiser Posted Wednesday, Oct. 21, 2009, at 1:41 PM ET The New York Times announced Monday that it plans to cut 100 newsroom jobs—about 8 percent of the total—by year's end. Distressed commenters on the Times Web site have expressed their willingness to pay more for online content or even donate. Can the Times, a publicly traded company, accept donations? Yes. Any company can accept money from eager customers. But whereas benefactors of nonprofits can claim charitable deductions on their taxes, supporters of for-profit ventures like the Times cannot. Indeed, the IRS would qualify such contributions as gifts rather than donations. It follows that there's a financial incentive to donate cash to even prosperous charities, but not to the ailing paper. Of course, the Times could accept deductible donations if it were a nonprofit company. In March, Sen. Benjamin Cardin of Maryland introduced the Newspaper Revitalization Act, a bill that would allow for-profit newspapers to redesignate themselves as nonprofits. Advertising and subscription revenue would then be tax-exempt, and all contributions would be deductible. The bill hasn't yet moved forward in Congress, nor is it clear how a debt-saddled, money-losing newspaper could reorganize itself as a viable nonprofit. Also, nonprofit status would engender considerable changes at the Times: Any tax-exempt organization is prohibited from making political endorsements (though political reporting is fine). A nonprofit can take positions on public policy issues but must avoid advocating a candidate, even implicitly. Newspaper Revitalization Act aside, becoming a nonprofit can be prohibitively expensive. In order to reorganize, a corporation must first liquidate its assets—the proceeds of which are taxable. Alternatively, the major shareholders could donate their stock to a newly formed or existing foundation. (Those unwilling to donate their shares could be bought out.) This nonprofit foundation would control the Times as a taxable, for-profit corporation (which can make political endorsements) and could accept deductible donations. This setup already exists: The Poynter Institute, a nonprofit educational institution, owns the St. Petersburg Times. To entice donors, the newspaper could also conceivably reorganize itself as a low-profit limited-liability company (L3C), a sort of happy medium between for-profit and nonprofit status. An L3C is run like a regular business, but its stated objective is something socially beneficial, with profitability as a secondary goal. Americans for Community Development, a coalition of organizations promoting L3C, have singled out newspapers as possible beneficiaries of this status. The catch here is that, as of yet, only a handful of states recognize L3C status. New York, where the Times is based, does not, and neither does the federal government. Got a question about today's news? Ask the Explainer. Explainer thanks Brian Price of Harvard Law School and A.L. Spitzer of Ropes & Gray LLP. Menachem Kaiser is a Slate intern.
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